Plan Now to Avoid the “Widow’s Tax Trap” Later

Talking with married clients about what happens if one of them dies is one of the most difficult conversations we have as financial advisors to thriving retirees. But there’s an even more difficult conversation that we sometimes have to face: explaining to a recently bereaved spouse why their tax bill is so much higher, now that their loved one has passed away.

This scenario happens all too often. First of all, the now-single surviving spouse is no longer eligible for “married, filing jointly”; instead they must file as a single taxpayer. Among other things, this means that their personal exemptions are cut in half. Also, because most thriving retirees have done such a good job of contributing to IRAs, 401Ks, and other qualified retirement plans during their working years, the surviving spouse, who is typically the beneficiary of those plans, is still required to take required minimum distributions (RMDs) each year, starting at age 72. Often they will be receiving virtually the same amount of income as a single taxpayer as they were when part of a married couple—but may now owe more taxes because of fewer exemptions and perhaps even being in a higher tax bracket. In addition, because the surviving spouse may elect to receive the deceased spouse’s Social Security benefit if it is more than they can receive on their own, they may be in the position of having to pay taxes on a larger percentage of Social Security income, because single taxpayers reach the higher tax thresholds for Social Security benefits sooner than married taxpayers.

Fortunately, with some planning ahead while both spouses are living, the effects of the “widow’s tax trap” can be mitigated, if not avoided altogether. By carefully considering the order in which funds earmarked for retirement are utilized, and by shifting income from future-taxable to future-tax-free, some of the worst consequences can be eased.

First, it may be advisable for retiring couples to “spend down” non-tax-qualified funds. Paying capital gains on appreciated investments may be smart, both because capital gains are generally taxed at a lower rate than ordinary income, and also because married couples will generally be in a lower capital gains tax bracket than single individuals. This may be a case where it makes more sense to “pay now” than to “pay later.”

Also, retiring couples should consider converting traditional IRA and 401K accounts to Roth accounts. While this will require paying taxes on the converted amount now—which may hurt a bit—it will transform the future income drawn from the account to tax-free income. Also, because Roth accounts have no RMDs, the surviving spouse has the flexibility to leave the assets in the account if they aren’t needed for current income. If they are needed, they typically won’t affect the taxability of Social Security benefits.

As a fiduciary financial advisor, Empyrion Wealth Management specializes in working with thriving retirees and those preparing for retirement to make informed, tax-efficient decisions as part of their financial strategy. To learn more, click here to read our “Financial Planning Checklist for Retirement.”

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Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.